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Can Divorce Debt Be Discharged?

Jul 10, 2006 | | Comments Comments Off
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Dear Liz: My husband owned a home with his first wife. In the divorce, she got the house with the stipulation that he would receive half of the $25,000 down payment when it was sold. She defaulted on the mortgage, however.

The lender sold the house at auction and then came after my husband for the amount that was still owed. The divorce papers had stated he would not be liable for such a debt.

My husband attempted to sue her for the $9,000 he paid the lender plus the $12,500 he was promised, but she filed for bankruptcy and his claim was one of the debts that was discharged. I’ve done research on the Internet and it seems like his debt shouldn’t have been erased.

Do you think we have a case?

A: It depends.

If your husband’s ex-wife filed her bankruptcy case before Oct. 17, 2005, when a new bankruptcy law took effect, then her debt to him could legally be erased, said Leon Bayer, a Los Angeles bankruptcy attorney.

The new law, by contrast, says that a debt created by a divorce agreement can’t be wiped out in a Chapter 7 bankruptcy liquidation, although it may be erased in a Chapter 13 repayment plan. If the debt was incorrectly eliminated, your husband would be able to pursue his former spouse for the $12,500, Bayer said. In addition, he could sue her for the $9,000 he paid to the lender if the divorce court required the ex-wife to hold him harmless from that debt, as your letter seems to indicate.

By the way, there is a chance that the lender shouldn’t have been able to dun your husband for the $9,000 debt. Several states, including California, have “anti-deficiency” laws that prevent mortgage lenders from trying to collect such debts if the loan in question was a “purchase money mortgage” in other words, if the loan was used to buy the property. If the loan was subsequently refinanced, though, anti-deficiency laws typically don’t apply.

If you still think your husband might have a case, Bayer recommends contacting a local attorney for help.

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